S&P 500 Outlook – More Upside, Watch 1740

The S&P 500 made a new high of 1693.12 this week, eclipsing the May high of 1687.18. This is a bullish sign, as buying pressure is continuing.

I won’t call a top to stocks just yet. The current trend channel places resistance in the 1740 to 1770 region. I’d expect to see some sort of pullback from there, of at least similar magnitude to prior pullbacks witnessed during this portion (since 2012) of the advance–about 130 points+.

1620 is where demand should now come in for the index in the short-term. If the S&P 500 drops below that, it will also likely drop below the 1560 June low and the 1536 April low. Longer-term strong demand is at 1400 followed by 1225.

I’m bullish until there is some sort of technical breakdown which indicates I shouldn’t be. That only occurs if the index drops below 1620, and ultimately takes out 1560 (creating a lower low), or we see a less severe pullback but the index begins to drop again before making a new high (creating a lower high). Either of these scenarios force the trend to be questioned. Which brings up strategy.

While I’m bullish at the moment, I don’t generally like buying on new highs (unless I’m only looking for a very short-term trade). Instead, I like buying once a pullback has occurred and the stock or ETF is starting to move back in the trending direction. Since the entry occurs a bit earlier the reward:risk profile of the trade is more favorable.